After 20 years, NAFTA a (qualified) success

After two decades, the age lines are starting to show on the NAFTA trade deal that at one time made Canada, the United States and Mexico the globe’s biggest and most affluent economic zone.

As the North American Free Trade Agreement celebrates its 20th anniversary of implementation Jan. 1, only a few voices would begrudge the pact’s birthday congratulations. Its accomplishments are often quoted.

Among the three countries, gross national product has ballooned, although Mexico appears to have gained the most traction. Trade flows have more than tripled — even accounting for the temporary retreat during and immediately following the deep 2008-09 recession.

No one is saying NAFTA was responsible for all this, but no one can argue that it led to disaster either.

Canadian Trade Minister Ed Fast, who has little patience for free-trade doomsayers, suggests that if there is a problem with NAFTA it is that it was a “20th-century free-trade agreement,” rather than a 21st century deal, like the one that Canada signed with the European Union in October.

By that, Fast means it didn’t include sub-national procurement, intellectual-property protection, regulatory co-operation, labour-mobility clauses and some other “innovations.” Still, it was at the time a model for the world.

“There were fear mongers back 25 years ago (when Canada signed NAFTA’s precursor with the U.S.). They claimed we were going to lose our sovereignty over fresh water, we would lose our health-care system, our culture, we were going to hollow out our economy and lose millions of jobs, it went on and on and on, and none of that came to pass,” says Fast.

“History has shown us that freer and more open trade has been a boon to Canada’s economy and a boon to Canada’s long-term prosperity.”

The minister is right in referring to the big daddy of trade deals, the Canada-U.S. agreement, as the cause of much angst back in 1987. Mostly, NAFTA grafted Mexico onto the hard-fought bilateral pact. And 20 years later, it’s still the Canada-U.S. economic partnership that dominates.

Bank of Montreal chief economist Doug Porter says Ottawa lobbied to create a NAFTA mostly as a defensive manoeuvre after it was clear the U.S. and Mexico would seek their own pact, which geographically would have put the U.S. in the cat-bird seat.

“In some ways we had no choice. Otherwise we really would have had a hub-and-spoke situation where the United States would have had a free-trade deal with both of us and we couldn’t have benefited that much from each other,” he said.

For many analysts, the arguments about free-trade deals are not whether they are good or bad, but whether the world had to go in that direction.

Free trade didn’t just pop into a policy wonk’s mind out of the blue. The march of history was leading the world to freer trade and a globalized economy, despite critics.

Technological changes that revolutionized factories, the advent of mass communications, and innovations in transportation that made moving products around the world faster and cheaper all pointed in one direction. Closed economies sheltered behind high tariffs and non-tariff barriers were going to lose the long game.

Not everyone sees it that way. Leading labour economist Jim Stanford of Unifor says a more targeted approach — such as sectoral arrangements with defined conditions, including the Canada-U.S. Auto Pact — would have brought larger benefits and without the disruptions that free-trade pacts tend to cause.

“Canada can and should be a big player in the world, we should not be insular, but FTAs are not the only way to do that,” Stanford says.

“We should be developing strategies for world-beating industries, but FTAs limit governments’ ability to do so and hence are actually inhibiting Canada and relegating us to secondary status in the world.”

That’s not the majority view, and the argument may be moot because we will never know if Stanford’s approach would have worked, or whether Canada could have found willing partners.

The numbers suggest NAFTA has boosted economic output overall, expanded bilateral trade, and transformed industries. In the case of Mexico, the transformation was virtually economy-wide.

For Canada, manufacturing has been in a free fall, but it’s not obvious that NAFTA was mostly responsible. Advanced nations are losing manufacturing jobs throughout the world — FTAs or no — in part because with modern processes and robotics, fewer people are needed to produce more goods, whether electronics or cars.

“Most of the impact on the loss of jobs has come from technology, not from trade,” says Stephen Blank, a New York-based expert on North American integration who has served as a visiting professor in several Canadian universities, most recently at the University of Ottawa.

“People feel like it must be trade, but everybody’s lost blue-collar jobs, nobody has gained jobs. Canada would be a hell of lot worse without NAFTA.”

Trade specialist Angeles Villarreal of the U.S. Congressional Research Service says it is difficult to tally up the gains and losses from free-trade deals. That’s because the losers tend to be localized and highly visible — a plant shuts in a town and the effect is devastating — while the benefits from lower prices and productivity improvements tend to be more incremental and widespread.

Given the integration of manufacturing that has come about since NAFTA, says Blank, it may not even be appropriate to talk about trade between Canada, U.S. and Mexico any more. We don’t trade with each other, he says; we make things together.

One study on the subject finds that Canadian exports to America contain 25 per cent inputs from the U.S., so only 75 per cent are truly Canadian made, or at least of non-U.S. content. Mexico has 40 per cent U.S. inputs.

For Blank, the only question is where do the three amigos, as they were once called, go from here?

Geography dictates that the Canada-U.S.-Mexico axis will always trump all others, regardless how many deals the three sign with Europe or Asia.

But Blank and some others believe the three partners should be thinking more strategically, as North Americans rather than as three distinct countries.

For instance, he asks, did it make sense for Canada to sign a free-trade deal with Europe, when the U.S. will soon follow with its own, then Mexico? Why wasn’t a North America-European Union agreement attempted? Why isn’t there a North American Chamber of Commerce, or a continental strategy on climate change?

The examples of where co-operation makes sense are endless, he says.

“Just recently the Department of Energy in U.S. produced an elaborate volume on the impact of climate change on energy infrastructure in the U.S. Doesn’t anybody in the department realize that energy infrastructure is increasingly an integrated U.S.-Canada infrastructure?”

He acknowledges that the appetite for such an approach is limited in the U.S., where trade with Mexico remains a controversial subject. But without thinking about those issues, NAFTA will continue to lose its special place in the continental reality, he says.

Fast largely dismisses such talk, but adds that NAFTA is being updated indirectly through the negotiations at the Trans-Pacific Partnership table, where all three countries are participating.

NAFTA may be showing its age, but it is still delivering for Canada, he says. Even under the new arrangement with Europe, NAFTA puts Canada in the favoured position of being the only country with access to the world’s two richest markets.

“We are fortunate because we have had two-and-a-half decades of experience with free and open trade, and certainly NAFTA put us on the world stage,” he says.